ITAT deletes PF, ESI disallowance u/s143(1)(a); Finance Act 2021 s.36(1)(va), 43B change prospective only

ITAT allowed the assessee's appeals and deleted the disallowance of employees' contributions to provident fund and ESI made as an adjustment under s.143(1)(a) for AYs 2019-20 and 2020-21. It held that the amendment to s.36(1)(va) and s.43B by Finance Act 2021 is prospective, applicable only from AY 2021-22, and cannot be used to justify adjustments for prior years. In the face of divergent non-jurisdictional HC decisions, the Tribunal adopted the view favourable to the assessee, holding that delayed employees' contributions could not be disallowed through prima facie adjustment under s.143(1)(a) for the impugned years.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether delay of 102 days in filing the appeals before the Tribunal constituted "sufficient cause" warranting condonation.

1.2 Whether, for assessment years prior to 2021-22, adjustment under section 143(1)(a) could be made in respect of employees' contribution to provident fund and employees' state insurance deposited after the due dates prescribed under the respective statutes, in light of section 36(1)(va), section 43B and the Finance Act, 2021 amendments.

1.3 Whether, in the presence of divergent non-jurisdictional High Court decisions on the temporal operation of the Finance Act, 2021 amendments to section 36(1)(va) and section 43B, the view favourable to the assessee should prevail.

1.4 Consequentially, whether other grounds (including disallowance under section 43B and alleged procedural violations in processing under section 143(1)) survived for adjudication after decision on the main adjustment relating to employees' contribution.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Condonation of delay in filing the appeals

Interpretation and reasoning

2.1 The Tribunal noted that the appellate orders were dated and stated as received on 28.06.2024, while the appeals were filed on 11.12.2024, resulting in a delay of 102 days.

2.2 The assessee explained, by condonation application, that based on the advice of the chartered accountant, it believed that the matter had effectively been remanded by the appellate authority to the Assessing Officer, and hence no appeal was initially preferred. Only after the Assessing Officer, in giving effect, reiterated the full disallowance, did the assessee seek legal advice from counsel and immediately file appeals.

2.3 The Tribunal accepted that the assessee had been ill-advised on the legal effect of the appellate order and that there was no mala fide or laxity in not filing the appeals earlier. The delay was held to be bona fide and attributable to wrong professional advice.

Conclusions

2.4 Delay of 102 days in both appeals was held to be for "sufficient cause", condoned, and the appeals were admitted.

Issue 2: Legality of adjustment under section 143(1)(a) for delayed deposit of employees' contribution to PF/ESI for AYs 2019-20 and 2020-21

Legal framework as discussed

2.5 The Tribunal recorded that:

(a) Under section 2(24)(x), sums received by an employer from employees as contribution to specified funds constitute income.

(b) Section 36(1)(va) allows deduction of such employees' contributions only if credited to the employees' accounts in the relevant fund on or before the "due date".

(c) Finance Act, 2021 inserted Explanation 2 to section 36(1)(va) (effective from 01.04.2021) clarifying that for this clause, "due date" is the date prescribed under the relevant statute, etc., and that section 43B does not apply for determining such due date.

(d) Finance Act, 2021 also inserted Explanation 5 to section 43B (effective from 01.04.2021) clarifying that section 43B never applied to sums received from employees to which section 2(24)(x) applies.

(e) The Memorandum explaining the Finance Bill, 2021 explicitly states that these amendments "will take effect from 1st April 2021 and will accordingly apply to the assessment year 2021-22 and subsequent assessment years".

2.6 The Tribunal took note of the Supreme Court judgment in Checkmate Services (P) Ltd., which held that employees' contribution not deposited within the statutory due date is not allowable; however, that decision was rendered on 12.10.2022, whereas the intimations under section 143(1) for the impugned years were issued earlier (14.07.2020 and 16.12.2021) at a time when High Court decisions, including of the Karnataka High Court, were favourable to assessees.

2.7 The Tribunal also referred to the amendments to section 143(1)(a) by the Finance Act, 2021, including amendment to clause (a)(iv) (regarding "increase in income" indicated in the audit report) and the fact that these amendments were also stated in the Memorandum to be effective from 01.04.2021 and applicable from assessment year 2021-22.

Interpretation and reasoning

2.8 The Tribunal observed that for assessment years 2019-20 and 2020-21, the law as clarified by the Finance Act, 2021 amendments to section 36(1)(va), section 43B and section 143(1) was legislatively stated to operate only from 01.04.2021 and to apply to AY 2021-22 onwards. Hence, applying the rationale and explicit effective-date language of the Memorandum, the Tribunal considered the amendments as prospective for the purpose of adjustments under section 143(1)(a).

2.9 It was further noted that prior to the Supreme Court's decision in Checkmate Services (rendered in October 2022), there existed divergent judicial views, and in the relevant jurisdiction the prevailing view allowed deduction of delayed employees' contributions if paid before the due date of filing the return. The Tribunal, therefore, held that at the time of processing under section 143(1), the issue was at least debatable and not a matter fit for prima facie adjustment.

2.10 The Tribunal relied upon non-jurisdictional High Court decisions which had treated the Finance Act, 2021 amendments as prospective, notably:

(a) Decision of the Chhattisgarh High Court holding the amendments to be applicable from AY 2021-22, and

(b) Decision of the Delhi High Court in the case wherein it was "categorically held" that the amendments to section 36(1)(va) read with section 43B by Finance Act, 2021 are prospective in nature and apply only from 01.04.2021, thus not covering earlier assessment years.

2.11 On this basis, the Tribunal held that the Central Processing Centre was not justified, for AYs 2019-20 and 2020-21, in making adjustments under section 143(1)(a) disallowing employees' contributions to PF/ESI deposited after the respective statutory due dates but prior to the due date of filing the return.

Conclusions

2.12 For assessment years 2019-20 and 2020-21, adjustments under section 143(1)(a) disallowing employees' contribution to PF/ESI deposited beyond the statutory due dates under the relevant Acts were held to be impermissible, as the relevant Finance Act, 2021 clarificatory amendments to sections 36(1)(va), 43B and 143(1) apply only from AY 2021-22 onwards.

2.13 The Assessing Officer was directed to delete the adjustments made in respect of such employees' contribution for both impugned years.

Issue 3: Effect of divergent non-jurisdictional High Court decisions on temporal operation of Finance Act, 2021 amendments

Interpretation and reasoning

2.14 The Tribunal observed that there existed contradictory decisions of non-jurisdictional High Courts on the issue of whether the Finance Act, 2021 amendments to section 36(1)(va) and section 43B are retrospective or prospective.

2.15 It reiterated the settled principle that where there are conflicting non-jurisdictional High Court decisions and no binding jurisdictional High Court or Supreme Court decision directly settling the temporal application of a statutory amendment, the view favourable to the assessee should be followed.

2.16 Applying this principle, and in view of explicit legislative indication and memorandum that the amendments take effect from 01.04.2021 and apply to AY 2021-22 onwards, the Tribunal adopted the interpretation that the amendments are prospective for the purpose of the instant appeals.

Conclusions

2.17 In the presence of conflicting non-jurisdictional High Court rulings on the retrospectivity of the Finance Act, 2021 amendments, the Tribunal followed the view favourable to the assessee, holding the amendments applicable only from AY 2021-22.

Issue 4: Survival of other grounds after deletion of main adjustment

Interpretation and reasoning

2.18 Having directed deletion of the primary adjustment under section 143(1)(a) relating to employees' contribution to PF/ESI for the impugned years, the Tribunal considered that other issues raised (including disallowance under section 43B for unpaid GST, alleged failure to send prior intimation of proposed adjustment under the first proviso to section 143(1)(a), and issues regarding opportunity of hearing and TDS credit mismatch) were rendered merely academic for the purpose of these appeals.

Conclusions

2.19 Remaining grounds were dismissed as academic, and the appeals were allowed for statistical purposes to the extent of deletion of the adjustments relating to employees' contribution under section 36(1)(va).

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